Grant’s Interest Rate Observer questions whether the Federal Reserve’s unconventional monetary policies can deliver the stable outcomes policymakers expect. It argues prolonged quantitative easing may distort risk pricing, suppress market signals, and create larger financial imbalances, challenging widely accepted assumptions about inflation and financial stability.
Calm before the storm
Grant's
Research
29 Pages
Key Takeaways
Inflation Link Questioned: Analysis finds the correlation between the output gap and year over year CPI since 1949 was minus 0.03, challenging a core justification for highly accommodative monetary policy.
Mortgage REIT Pressure: AGNC's estimated net interest yield could fall from 15.1% to 8.2% after QE3 compressed mortgage backed security yields, highlighting pressure on future dividend payouts.
Volatility Mispriced: The MOVE Index stood at 60.4 versus its long term average of 102, suggesting interest rate volatility was being priced well below historical norms.
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